If you’re self-employed in construction, the Construction Industry Scheme (CIS) may affect how you get paid.
Rather than paying you your full labour costs, the contractor deducts tax up front and sends it straight to HMRC on your behalf.
You’ll also get a CIS payment statement, so you can see exactly how they calculated the deduction.
How does CIS work?
The scheme involves two types of construction business:
- Contractors pay subcontractors to carry out construction work.
- Subcontractors carry out construction work for contractors.
A business can be both. For example, you may be a self-employed builder working as a subcontractor on a large development while also paying an electrician or plasterer to help with a separate job.
If you’re taking on a subcontractor, you first have to check their CIS status with HMRC – this will inform you whether to deduct tax at 20%, deduct it at 30%, or pay the subcontractor gross.
The deduction is normally made from the labour charge. Certain amounts included on the invoice, such as VAT and the direct cost of materials supplied by the subcontractor, are excluded from the CIS calculation.
Read HMRC’s overview of the Construction Industry Scheme.
Who counts as a CIS contractor?
You will normally be a ‘contractor’ if you pay subcontractors to carry out construction work as part of your business.
This includes construction businesses such as builders, property developers and civil engineering firms. It can also include businesses outside the construction industry if they spend enough on construction work over a set period.
Don’t assume CIS only applies to large construction firms. Even a small builder who occasionally brings in another tradesperson may fall within the rules.
Contractors have several responsibilities. These include registering for CIS, checking whether workers should be treated as employed or self-employed, verifying subcontractors, making deductions and submitting monthly returns.
CIS doesn’t override the normal employment status rules. If a worker is really an employee, they can’t be paid as a subcontractor just because it suits both parties.
Who counts as a subcontractor?
A ‘subcontractor’ is a business that carries out construction work for a contractor.
You might operate as:
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- a sole trader
- a partnership
- a limited company
Many CIS subcontractors are sole traders working in trades such as bricklaying, carpentry, roofing, plumbing, decorating, electrical installation and groundworks.
Registering as a subcontractor is not legally required, but failing to register usually results in deductions of 30% rather than 20%.
You must already be registered as self-employed before you can register for CIS. Find out more in this guide: how to register as self-employed with HMRC.
You can then use the GOV.UK CIS registration service.
What type of work is covered?
CIS applies to a broad range of work on buildings, structures and land. It is not restricted to building new houses.
Work covered by the scheme can include:
- site preparation and groundworks
- demolition and dismantling
- building and civil engineering
- repairs and alterations
- painting and decorating
- installing heating, lighting, power, water and ventilation systems
- cleaning carried out as part of a construction project
Some work is excluded. Architecture, surveying and the delivery of materials are generally outside CIS when supplied on their own. Work carried out directly for a homeowner may also fall outside the scheme because the homeowner is not usually acting as a construction contractor.
The precise position can depend on what has been agreed and what work is actually carried out.
HMRC lists the types of work covered and excluded in its official CIS guidance.
How much tax is deducted under CIS?
There are three possible payment rates.
| CIS status | Deduction rate |
|---|---|
| Registered subcontractor | 20% |
| Subcontractor not registered for CIS | 30% |
| Subcontractor with Gross Payment Status | 0% |
Registered subcontractor
Usual deduction: 20%
The contractor deducts tax from the amount covered by CIS.
Not registered
Usual deduction: 30%
The higher rate can put considerable pressure on cash flow.
Gross Payment Status
Deduction: 0%
The subcontractor receives the full eligible payment and settles tax separately.
A simple CIS deduction example
A registered subcontractor sends the following invoice:
- Labour: £1,500
- Materials: £500
- Total before VAT: £2,000
Assuming the £500 represents the direct cost of materials supplied for the job, the 20% deduction is made from the £1,500 labour charge.
The CIS deduction is therefore £300.
The contractor pays the subcontractor £1,700 before accounting for VAT and remits the £300 deduction to HMRC.
The subcontractor should receive a payment and deduction statement showing the gross payment, materials excluded from the calculation and the amount deducted.
Does being part of CIS mean you have already paid your tax?
This is a very frequently asked question. The answer is not necessarily.
CIS deductions are payments towards your eventual tax bill, but they are not a final calculation of what you owe.
A sole trader must still work out their annual sales, allowable expenses and taxable profit. The CIS deductions are then set against the Income Tax and National Insurance calculated through Self Assessment.
This can produce one of three results:
- you have paid too much and can claim a refund
- the deductions roughly cover the amount due
- you still have tax to pay
A refund is common where 20% has been deducted from labour income, but the subcontractor has significant allowable expenses. It is not automatic, however, and the amount depends on the subcontractor’s complete tax position.
See our guide to completing a Self Assessment tax return.
Can CIS subcontractors claim expenses?
Yes. CIS changes the way tax is collected, but it does not remove your right to claim legitimate business expenses.
Depending on the work you do, these may include:
- tools and equipment
- protective clothing
- van and travel costs
- business mileage
- public liability insurance
- accountancy fees
- phone costs
- materials not reimbursed by a contractor
The normal tax rules still apply. An expense must be incurred for the purposes of your trade, and private use may need to be removed from the claim.
Useful ByteStart guides include:
- What business expenses can a sole trader claim?
- Claiming tools and equipment as a sole trader
- Mileage allowance for the self-employed
- Can sole traders claim clothing expenses?
What CIS records should you keep?
Keep every payment and deduction statement issued by your contractors. Check each one against the payment received and promptly raise any discrepancies.
You should also retain:
- sales invoices
- receipts for materials and other expenses
- bank statements
- mileage and vehicle records
- details of work carried out
- records of any subcontractors you pay
Keep your own records as well. If HMRC queries your tax return, you’re responsible for the figures you submit, not the contractor.
HMRC may request supporting records, so they should be retained for the required period after the relevant filing deadline. See how long self-employed tax records must be kept.
Can a limited company be paid through CIS?
Yes. A limited company can register as a CIS subcontractor and have deductions made from its income.
The company does not reclaim those deductions through an individual director’s Self Assessment return. It normally sets them against PAYE, National Insurance and other amounts due through its payroll reporting.
Running a limited company under CIS therefore involves a different administrative process from working as a sole trader.
Anyone considering incorporation should consider the broader tax, accounting, and legal consequences rather than changing the structure solely because of CIS. Our comparison of sole trader and limited company businesses covers the main differences.
What is Gross Payment Status?
Gross Payment Status allows an eligible subcontractor to receive CIS payments without tax being deducted.
This can improve cash flow, but it does not make the income tax-free. The business must set aside funds and pay its taxes through the usual system.
HMRC applies conditions relating to how the business is run, its turnover and its history of meeting tax obligations. Gross Payment Status can also be withdrawn if those conditions are no longer met.
It tends to be most useful for established subcontractors with strong tax compliance and sufficient financial controls to manage their own tax payments.
Do you need to register as both a contractor and subcontractor?
It’s quite common for a tradesperson to work as a subcontractor on one job while hiring other subcontractors on another. A local builder, for example, might work for a large construction company during the week but bring in an electrician or plumber when managing a smaller project of their own.
If this is your situation, you may need to register as both a subcontractor and a contractor.
Registering as a subcontractor doesn’t automatically cover your responsibilities as a contractor. If you’re paying subcontractors, you may need to verify them with HMRC, make the correct deductions and submit monthly CIS returns.
It’s much easier to get this set up before you start making payments. Registering late or failing to meet CIS reporting requirements can result in penalties.
